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In The News - 2016

  News from 2017
December 29, 2016 Why Volatility Will Ring in the New Year for Munis - The Bond Buyer
December 12, 2016 How Muni Mutual Funds Weathered a Post-Election Storm - The Bond Buyer
December 9, 2016 Muni Volume Drops to $4B for Fed Week - The Bond Buyer
November 2, 2016 Why the Buy Side Has Pre-Election Jitters - The Bond Buyer
September 9, 2016 September Surge: N.Y. MTA & TFA Lead $11.4B Week - The Bond Buyer
August 8, 2016 Muni Market Waiting for New Issuance - The Bond Buyer
July 1, 2016 How the Muni Market Sails Past Disaster - The Bond Buyer
June 24, 2016 After Brexit Rally, Munis to See Low Yields, Strong Demand - The Bond Buyer
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Why Volatility Will Ring in the New Year for Munis

Thursday, December 29, 2016
By Christine Albano

As the market prepares to ring in 2017, municipal experts predict changes to tax laws, interest rates, inflation, and volume will drive the market in the year ahead.

Tax reform under the Trump presidency will continue to dictate demand in the municipal market in the New Year, since tax cuts can reduce the attractiveness of tax-exempt income, said Jeff MacDonald, director of fixed income strategy and a portfolio manager at Fiduciary Trust Co., in a Nov. 29 interview.

Trump's plan calls for the reduction of the current seven tax brackets down to three, lowering the top marginal rate to 33% from 39%, eliminating the 3.8% Affordable Care Act tax, and capping itemized deductions at $100,000 for individuals and $200,000 for couples.

"The tax exemption will compress to some degree in a lower tax environment and it certainty has implication for muni investors in 2017," MacDonald said.

The potential tax changes could result in a five-basis point drop five point price drop on longer term bonds even though yields recently corrected and normalized following the November selloff, according to Michael Belsky, senior portfolio management director at Morgan Stanley Wealth Management's Vector Group.

Other concern is that inflation might rise quickly if there is an infrastructure bill passed "without any real way to pay for it," Belsky said.

Longer term, Belsky said, "investors might dip their toe in and commit some funds if they have flexibility or cash."

"If there is no grand tax bargain agreement, we might see a rebound," Belsky said. "Of course, if stocks sell off at a time when current yields are higher, then there might be strong interest in munis."

Jon Mondillo, portfolio manager and head of municipal trading at Alpine Funds, said depending on how and when infrastructure spending is implemented, investors need to remain cautious going into 2017.

Demand could depend on volume, experts like Tim McGregor, director of municipal fixed income at Northern Trust Asset Management in Chicago, said. Supply began to moderate in late 2016 after the big wave of refinancing supply was done at attractive record low yields in the early fall.

"Starting 2017, volume will be down; there are not that many bonds left to refinance given the higher rate environment," McGregor said, noting that $220 billion of the total 2016 volume total will account for refinancing debt. In addition, McGregor expects Trump's potential infrastructure investment plan to reduce some municipal financing and have an impact on state and local governments' future traditional borrowing.

Chris Brigati, head of municipal trading and managing director at Advisors Asset Management, advised investors heading into 2017 to maintain a lower duration bias and look for the best value between 10 to 15 years, maturing from 2026 and 2031, with five to seven-year call protection.

"Those bonds have benefitted from a back-up in rates and have enough yield to justify" participation, according to Brigati. They also provide a cushion in a rising rate environment, he said.

Others are advocating investors to seek out value before future supply tapers off significantly.

Impending bond calls, coupon payments, and redemptions should provide ample opportunity for cash flush investors ahead in 2017, MacDonald said.

"We will have a healthy cycle of maturities in the next few months and they can reinvest in a yield environment that is more favorable than we witnessed in the early part of 2016," MacDonald said.

Michael Pietronico, chief executive officer at Miller Tabak Asset Management, also advocates investing in the coming year.

"We recommend investors add cash to the tax-free market as pundits are oversimplifying how the economy will play out in 2017," Pietronico said in a Dec. 7 interview. "Mr. Trump, the President, is likely to act in a manner quite differently than Mr. Trump, the Republican Presidential candidate," he said. "We anticipate a healthy positive return in municipals next year as the market has gotten too bearish on the potential for greater inflation and growth."

McGregor, meanwhile, said he anticipates being able to diversify his portfolios in the coming year.

"Volatility creates more activity and more opportunity and I see more of the same in 2017," he said. "The muni market will overreact with the best of them and I am sure we will see it again.

"I'm looking for tax-free income flow to be higher and that's the silver lining being able to reinvest cash at better yields and hope it offsets some of the initial pain," McGregor said.

He advises investors to keep cash levels higher to take advantage of new investment opportunities, keep credit quality high, and tactically add single-A securities.

In 2016, McGregor remained underweight in single A credits and overweight in triple-A and double-A paper, with the assumption that redemptions push spreads wider, creating buying opportunities.

"If we continue to see some outflows in mutual funds the industry will eventually start selling lower credit quality," which will prompt credit spreads to widen in 2017, he said.

McGregor said he will look to add solid, single-A airport revenue bonds, for instance, if they cheapen to a 100 basis point spread to the generic triple-A scale, from 70 basis points currently.

Other fund managers and investors may take a wait and see approach when it comes to reinvesting in the municipal market as the New Year gets underway.

"The tax-exempt market will also take its cue from Treasuries, which, for the time being, remain solidly in bear market territory," Triet Nguyen, head of public finance credit at NewOak Capital, said on Dec. 7. "Although everyone's hanging their hat on the January reinvestment effect, one should keep in mind that investors may decide not to fully reinvest in the muni market as they chase other opportunities that are part of the Trump rally."

Mondillo said he built liquidity and shortened duration for his funds at the start of 2016, and will be well positioned for expected volatility in 2017.

"We could see a little bit of a rebound, as we saw in 2016 in January and February, but overall I think we will see interest rates rise over the course of 2017," Mondillo said.

He described that volatility in terms of many "unknowns" that could impact the market, such as potential fiscal spending enacted, infrastructure, and tax reform policies.

"I would look for yields to back off even further," given that the sell-off was "overdone," and interest rates abroad are ticking up, Mondillo said.

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How Muni Mutual Funds Weathered a Post-Election Storm

Monday, December 12, 2016
By Christine Albano

Municipal bonds were hit by a month-long selloff after the Presidential election that left muni fund managers licking their wounds.

"For most municipal bond indexes, the November negative returns more than wiped out the previous 10 months' total return," said Dorothy Thomas, senior vice president and director of tax-exempt fixed income for Regions Investment Management. "In addition, the effect of sudden selling pressure tested market liquidity and put more downward pressure on bond prices."

Muni yields, which move inversely to price, surged on concern that Donald Trump's victory in the presidential race and Republican control of the House and Senate would open the way to tax reforms that dissipate the value of or eliminate the bonds' tax exemption. The S&P Municipal Bond Index finished down 3.46% in November, the worst monthly total return since September 2008, according to S&P Dow Jones Indices.

The Robinson Tax-Advantaged Fund was among the long, closed-end funds that got hit "pretty hard," according to fund manager Jim Robinson, founder and chief investment officer of Gross Pointe Farms, Mich.-based Robinson Capital Management.

"We were down 4.39% since the election through Monday's close," he told The Bond Buyer on Dec. 7. "We've since seen a strong recovery up 2.73% since [Dec. 5] as the underlying municipal bond market has finally caught a bid.

"I think the market has finally figured out that it had overcorrected and we are now seeing it make up for that."

Robinson's $150 million fund hedges duration risk with short positions in U.S. Treasury futures contracts to avoid making interest rate bets and remain rate agnostic. It typically offers a 4% tax-exempt monthly yield distribution, Robinson told The Bond Buyer before the election.

"There's always a loss to harvest because of the hedging, on one side or the other munis or Treasuries are going down in value," Robinson said in a Nov. 4 interview with The Bond Buyer. While the recent price depreciation in municipals and Treasuries was challenging, he said his strategy still proved effective.

The level of Treasury yields at any point in time is less of a concern than the relationship between municipal bond yields and Treasury yields, Robinson said. The fund's strategy measures relative value by comparing the yield to worst on the Barclays Investment Grade Municipal Bond Index to the yield to worst for the Barclays Aggregate Investment Grade Corporate Bond Index.

On Election day, for instance, the yield to worst for the municipal index was 1.99% and the yield to worst for the corporate bond index was 3% -- meaning municipal yields were roughly 66% of taxable corporate bond yields, Robinson said. On Dec. 2, the yield to worst for the muni index was 2.84% and the yield to worst for the corporate bond index was 3.40%, indicating muni yields rose to nearly 84% of their taxable corporate counterparts in a little less than a month.

"That's a much bigger move than the 9.8% decrease in marginal tax rates that Trump has proposed," Robinson said.

Trump's plan calls for the reduction of the current seven tax brackets down to three, lowering the top marginal rate to 33% from 39%, eliminating the 3.8% Affordable Care Act tax, and capping itemized deductions at $100,000 for individuals and $200,000 for couples.

"Regardless of the anticipated decline in the marginal tax-rate and the recent rise in yields, we believe our 4.35% distribution yield, which we distribute monthly, remains competitive for investors looking for tax-exempt income with minimal credit or interest rate risk," the Robinson fund CEO said.

Investors have continued to pull money from munis, as weekly reporting municipal bond funds saw outflows of $2.214 billion in the week ending Dec. 7, according to Lipper data.

But the most recent week's outflows have slowed from last month. In the week ended Nov. 16, investors withdrew $3.011 billion, according to Lipper data, the biggest outflow in more than three years, the fund tracker reported.

The cash exit was followed by two additional weeks of total outflows among the weekly reporters $2.232 billion in the week ended Nov. 23, and $2.081 billion in the week ended Nov. 30, according to Lipper.

The 54-week inflow frenzy of 2016 came to an end thanks to "a perfect storm of negative fund flows, higher rates, cheaper relative value ratios, and wider credit spreads" as the election neared, according to Jeffrey Lipton, managing director and head of municipal research at Oppenheimer & Co., in a Dec. 5 report.

"The selling pressure did not stop until the tax-exempt curve exceeded the Treasury curve across all maturities and, over the past three to four days, we've witnessed a significant rebound in the market," Triet Nguyen, head of public finance credit at NewOak Capital, said in an interview on Wednesday.

"That said, further retracement of recent losses may be capped by year-end bond swapping to harvest tax losses and further redemptions from fund investors upon receipt of their November account statements.

"The last 25 to 30 basis-point rise in the curve can arguably be attributed to a technical overshot due to fund selling pressure, heavy dealer inventory, and perhaps reduced market liquidity overall," Nguyen said.

Michael Belsky, senior portfolio management director at Morgan Stanley Wealth Management's Vector Group, said recovery could be challenging for some funds in the aftermath of the sell-off.

The market had been volatile since the election, causing a string of sessions in which municipal yields spiked -- 22 basis points on Nov. 14 and 10 basis points on Nov. 30, for instance. Meanwhile, ratios of triple-A municipals to Treasuries had soared above 100% from 10 through 30 years, according to MMD.

"If closed end funds sell off hard, they have the potential to bounce back if the asset class starts to be favored by investors," Belsky said. "But liquidity in [closed-end funds] is sometimes an issue because they don't trade in high volume."

As a fixed income portfolio manager in the 14-member Vector group he co-founded in 2009, Belsky oversees $120 million of individual municipal bond holdings in Vector's Bespoke Customized Portfolios.

"The Trump Tantrum not only continues to drive market behavior, but performance for the year seems as though its beginning reference date is Nov. 8," according to Lipton.

"The bond rout is very much reminiscent of the 2013 Taper Tantrum," when 10-year Treasury yields surged about 135 basis points and investors reallocated money into risk assets, Lipton said.

Other fund managers said the market's reaction to the election was painful, but pointed to opportunities amid continued volatility, even as the municipal market remains wary of Trump's tax plan and general uncertainty over government spending and inflation.

"Everyone looked at where they thought interest rates would be a year after Trump was in office and moved to a terminal rate almost immediately," John Mousseau, director of fixed income at Cumberland Advisors told The Bond Buyer on Wednesday.

"In the end, it was fear of inflation rather than inflation which killed the market," Mousseau said. "The fact that $40 billion of bond fund inflows came in this year, it made for a swift exit of at least a quarter of it."

Outflows from bonds funds are putting additional, longer-term pressure on the municipal market, "However, the activity suggests yields are beginning to look attractive," said J.R. Rieger, managing director and global head of fixed income at SPDJI.

While the municipal market has seen a spotty recovery, Lipton said there may be more volatility ahead.

"We still do not believe that the substantial back-up in yields, over such a brief time period, provides an appropriate interpretation of the Trump agenda," Lipton wrote. "We may very well see some additional weakness with continued outflows."

Municipal bond losses may reflect more uncertainty about future tax policy changes under a new regime, agreed Thomas at Regions Investment Management.

She said the municipal market experienced a bigger sell-off than other fixed income sectors as yields were affected by increased prospects for economic growth and higher inflation as other markets were.

Thomas said Regions a registered investment advisor that oversees the management of $9.91 billion in client assets as of Sept. 30 is not changing its defensive strategy of relatively short maturity structures, high coupons, and strong credit quality for its municipal bond portfolios, since it anticipates further increases in interest rates ahead.

She also wouldn't characterize the municipal market as oversold as opportunities could arise at new levels. "More volatility around policy uncertainty and illiquidity may lead to buying opportunities when the market retreats" she said on Thursday.

Despite the market volatility, bond funds are a better bargain than they were ahead of the election, Mousseau of Cumberland said.

"Bond funds are a bargain in the sense that they got clobbered in the downdraft," he explained. "Selling begot more selling and the drop in the NAVs became a negative feedback loop not unlike the 2013 Taper Tantrum."

The sell-off put individual bonds in greater demand by unleveraged bond fund holders, as the individual bonds could be purchased with yields of 4.25% or higher, Mousseau said. "The flexibility of owning individual bonds gives different options if cash needs to be raised. On the contrary, if one only owns bond funds they are subservient to one price and one price only the NAV of the bond fund -- which was plummeting."

"A substantial rally is now underway in municipal bonds that was easily predictable to most trained observers," Michael Pietronico, president of Miller Tabak Asset Management, said in an interview on Wednesday.

On Wednesday, the market saw a significant correction as 10-year municipal yields dropped 30 basis points and the 30-year municipal yields had declined by 28 basis points, picking up steam after initially beginning to rally on Dec. 2. Wednesday's rally was interrupted Thursday as yields on top-quality 30-year maturing municipal bonds rose by as much as three basis points from 3.07%, according to Municipal Market Data.

"The entire U.S. bond market was caught off guard by the victory of Donald Trump and, as such, a back-up in yields needed to happen to adjust to the reality of a newly-elected President with both chambers of Congress held by the same party," Pietronico said.

"The problem we have with the sell-off in municipal bond prices is that it far exceeded that of the Treasury market and, at its worst, tax-free bonds were valued as fully taxable, which is unsustainable in our view," Pietronico said.

"Municipals typically outperform U.S. Treasuries in periods of price erosion," Lipton wrote. "But the current sell-off is rather atypical and can be heavily linked to certain political and fiscal assumptions that may be difficult to quantify."

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Muni Volume Drops to $4B for Fed Week

Friday, December 9, 2016
By Chip Barnett and Aaron Weitzman

Municipal bond traders will have a lot less to work with, as the new issuance calendar shrinks ahead of the Federal Open Market Committee meeting on interest rates.

Volume for the week ending Dec. 16 is forecast by Ipreo to drop to $4.01 billion, from a revised total of $6.64 million in the previous week, according data from Thomson Reuters. The calendar is comprised of $3.24 billion of negotiated deals and $771 million of competitive sales.

There are only eight deals on the calendar that are larger than $100 million, and seven of those are negotiated deals.

The Federal Reserve policy makers are expected to raise the fed funds target rate 25 basis points to between 1/2 and 3/4 percent on Wednesday.

Issuers have a track record of staying away from issuing the week of a scheduled FOMC announcement, especially the day of the announcement.

Although the Fed has pulled surprises before, observers doubt it will happen this time.

"There's little thought given to the Fed not raising rates that I'm aware of," said Gary Binkiewicz, senior vice president and head municipal bond analyst at R. Seelaus and Co. "Perhaps there is a FOMC factor as to its lightness; there's also the interest rate implications for potential refunding deals that might be contributing" to the weakness in volume.

Michael Pietronico, CEO at Miller Tabak Asset Management said that the market has been conditioned with this Federal Reserve never to say never, as members have proven to be quite capable of finding other reasons not to tighten monetary policy.

"We see a 90% chance of a Fed tightening next week," he said.

Since it takes about two weeks to close on a transaction, deals that might not look like 2016 business could be held off until 2017, Binkiewicz said.

Barclays is expected to price the largest deal on the calendar – $500 million of dedicated capital improvement tax bonds from the Chicago Board of Education. There is no expected pricing date, and the timing is dependent on market conditions, according to Chicago Public Schools spokeswoman Emily Bittner.

The sale will be under a new dedicated capital improvement tax crafted to provide a borrowing outlet it can present as insulated from both the district's operating struggles and the threat of Chapter 9 bankruptcy.

The new structure offers a new ad valorem tax pledge distinct from the district's traditional double-barreled offering of a general obligation pledge and alternate revenue source pledge.

The isolation of the revenues earned the bonds an A rating from Fitch Ratings. That's eight notches above the junk level rating of B-plus Fitch assigns to the district's GOs. Kroll Bond Rating Agency was the other rating agency asked to rate the new, non-GO structure. It assigned a BBB. Fitch, Moody's Investors Service and S&P Global Ratings all rate the district's $6.8 billion of GOs at junk level. Kroll assigns a BBB-minus rating to most of the outstanding GOs and a BBB to a sale earlier this year. All assign a negative outlook to the GOs.

"We would give it a 50/50 chance[of coming to market next week] at this point," said Pietronico. "There is not a lot of money chasing weaker credits right now given the outflows in the mutual fund space."

Citi is scheduled to run the books on the New York State Housing Finance Agency's $223 million of affordable housing revenue bonds and climate certified green bonds on Tuesday following a one day retail order period. The deal will be separated into $99.115 million of revenue green bonds and $123.445 million of revenue bonds. The green bond portion will be the first ever affordable housing green bond deal. The deal is rated Aa2 by Moody's.

"New York demand has been very solid and with yields having moved up the last few months, we see retail [investors] as having interest in this deal, especially if they reside in New York State," Pietronico said.

Morgan Stanley is slated to price the University of Pittsburgh's $200 million of revenue bonds on Tuesday.

With its solid higher education credit, the University, which hasn't been to market since 2014, "should be well received," Binkiewicz said.

Pietronico agreed, saying that "since the new issue market will be slowing down as the holidays approach and as such Pennsylvania residents and even national portfolios will be looking for opportunities to invest."

In the competitive arena, the one sale that is notable will take place on Wednesday, when the Omaha Public School District No. 001, Neb., will be auctioning $141 million of general obligation bonds. The deal is rated Aa1 by Moody's and AAA by S&P.

Secondary Market

Top shelf municipal bonds finished weaker on Friday. The yield on the 10-year benchmark muni general obligation rose two basis points to 2.31% from 2.29% on Thursday, while the yield on the 30-year increased two basis points to 3.12% from 3.10%, according to the final read of Municipal Market Data's triple-A scale.

U.S. Treasuries were also weaker. The yield on the two-year Treasury rose to 1.13% from 1.10% on Thursday, the 10-year Treasury gained to 2.47% from 2.38%, while the yield on the 30-year Treasury bond increased to 3.15% from 3.08%.

The 10-year muni to Treasury ratio was calculated at 93.8% on Friday compared to 95.9% on Thursday while the 30-year muni to Treasury ratio stood at 98.8% versus 100.4%, according to MMD.

Week's Most Actively Traded Issues

Some of the most actively traded issues by type in the week ended Dec. 9 were from New York, New Jersey and California, according to Markit.

In the GO bond sector, the New York City 4s of 2043 were traded 156 times. In the revenue bond sector, the New Jersey Economic Development Authority 5s of 2041 were traded 49 times. And in the taxable bond sector, the California 7.55s of 2039 were traded 12 times.

Week's Most Actively Quoted Issues

Illinois, New Jersey and California names were among the most actively quoted bonds in the week ended Dec. 9, according to Markit.

On the bid side, the Illinois taxable 6.63 of 2035 were quoted by 54 unique dealers. On the ask side, the N.J. EDA revenue 4.75s of 2031 were quoted by 308 unique dealers. And among two-sided quotes, the California taxable 7.55s of 2039 were quoted by 24 unique dealers.

Lipper: Muni Bond Funds Report Outflows

Municipal bond funds experienced more outflows as investors pulled cash out of the market, according to Lipper data released late Thursday.

The weekly reporters saw $2.213 billion of outflows in the week ended Dec. 7, after outflows of $2.081 billion in the previous week.

The four-week moving average remained in the red at negative $2.385 billion after being negative $1.815 million in the previous week. A moving average is an analytical tool used to smooth out price changes by filtering out fluctuations.

Long-term muni bond funds had outflows, losing $1.208 billion in the latest week after shedding $1.238 billion in the previous week. Intermediate-term funds had outflows of $690.530 million on top of outflows of $523.811 million in the prior week.

National funds had outflows of $1.750 billion after outflows of $1.745 billion in the previous week. High-yield muni funds reported outflows of $775.563 million in the latest reporting week, after outflows of $714.491 million the previous week.

Exchange traded funds saw outflows of $127.509 million, after inflows of $6.013 million in the previous week

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Why the Buy Side Has Pre-Election Jitters

Wednesday, November 2, 2016
By Christine Albano

A Donald Trump victory in Tuesday's presidential election might rock municipal bonds by triggering volatility in broader financial markets, as investors weigh concerns over the Republican candidate's attitudes on debt.

Beyond that, it's hard to predict how the election outcome might affect the municipal market, buy-side analysts and investors said. Both Trump and Democratic nominee Hillary Clinton have said they want to step up investment in infrastructure, which would boost munis. At the same time, neither candidate has specified how their tax reform proposals would affect the municipal tax exemption that has traditionally encouraged investment.

"The primary election impact on the municipal market is the likelihood of increased federal support for infrastructure investment," said Alan Schankel, municipal strategist at Janney Capital Markets. "Treasury and other markets will see initial volatility if [Trump] is elected, at least until there is more clarity about his specific policy proposals and objectives."

Trump in May suggested a partial default on U.S. outstanding sovereign debt obligations in order to renegotiate with current holders at a discount if interest rates increased. That and his four corporate filings of Chapter 11 bankruptcy raised concerns over his debt management skills.

Trump's comments on refinancing or renegotiating debt have been "a bit opaque," even after he retracted the earlier statements, Schankel said.

"His choice for Treasury secretary will be closely watched for signs of policy direction," Schankel said. He added that he sees no direct impact on municipal bonds from concerns over Trump's debt positions, saying munis will generally move in the same direction as Treasuries.

The election's "greatest impact to munis would occur if their exemption is capped, or worse, eliminated," David Litvack, managing director and head of tax-exempt research at U.S. Trust, Bank of America Private Wealth Management, said in a report.

"It is also important to note that comprehensive tax reform requires an extraordinary amount of political consensus and is very difficult to achieve," Litvack said. The last structural change that affected the tax treatment of municipal bonds was the Tax Reform Act of 1986.

"Limiting or eliminating tax preferences is very controversial, and numerous special interests have powerful lobbying efforts to preserve them," Livack said.

While Clinton and Trump's tax reform proposals differ, changes in the code can undermine the value of municipal bonds, said Michael Pietronico, chief executive officer of Miller Tabak Asset Management.

"Both Hillary Clinton and Donald Trump have tax plans, which if implemented in full, would be negative for municipal bond valuations," Litvack said in his September report.

A victory by Clinton may eventually mean an increase in the marginal tax rates for those who earn over $250,000 and a resulting increase in municipal demand, while a Trump win could lead to lower marginal tax rates, curtailing demand, muni market participants said.

"My initial thoughts are that Clinton wins and it's a net positive for munis on the demand side," said Peter Block, managing director at Ramirez & Co., in an Oct. 26 interview. "Her proposal to increase marginal tax rates on taxable incomes above $250,000 will be a driver of demand," he said. "Clinton will not kill the muni tax exemption, as she supports infrastructure."

Clinton's proposal includes a new tax bracket for income over $5 million with a 43.6% marginal rate, up from the current top rate of 39.6%, as well as maintaining the 3.8% investment surtax.

"She would also cap the benefit of itemized deductions and certain exclusions, like tax-exempt interest, at 28%, so if her entire plan were implemented, it would be negative for municipal bond pricing," Litvack said.

Trump's tax plan, by comparison, reduces the current seven tax brackets down to three, with a top marginal rate of 33%. He also wants to caps itemized deductions at $100,000 and $200,000 for couples.

"Regardless of who is elected, the municipal market can expect to experience some repercussions from a new administration," Rick Calhoun, first vice president of Crews & Associates, told The Bond Buyer in an Oct. 26 interview.

Under a Trump win, the market will see a "lighter regulator touch and possibly even a smaller regulatory bureaucracy," Calhoun said. "This could impact new municipal disclosure rules and other current issues," Calhoun suggested. "If Republican campaign promises to lower marginal tax rates are honored, municipal demand could be reduced regardless of what happens to interest rates."

If Clinton is declared president, Calhoun said there will be renewed attempts to end tax-exempt financing in a quest to increase federal revenue. "There may also be a regulatory push to curtail municipal trading by some of the biggest banks, which would certainly hurt liquidity in the municipal market," Calhoun said.

Dick Larkin, director of municipal credit analysis at Stoever Glass & Co. in Boca Raton, Fla., said municipals' tax-exemption "is at real risk."

"Mr. Trump wants to cut taxes and needs portals in order to do that," he explained. "Secretary Clinton has made it clear that she looks to raise taxes from the wealthy, and probably looks at muni tax-exemption as a mere loophole."

John Donaldson, director of fixed income at The Haverford Trust Company, believes the municipal market is not in jeopardy from either candidate.

"We continue to believe that fears of elimination of tax-exemption are overstated," Donaldson, who leads the fixed income team, recommends fixed income strategies, and oversees the investment portfolios for the Radnor, Pa.-based wealth management firm, said.

"It is never a zero risk, but is very, very unlikely," Donaldson, a vice president at the firm, said.

"There remains a broad consensus for the public policy goal that state and local governments should benefit from lower cost financing," Donaldson added. "We do not see a change in that consensus in any outcome."

Rather than concern over elimination of tax-exemption, he said, the more "remarkable" aspect of the election is that state and local voters will "most certainly approve" a record dollar amount of bond financing.

Chief among the ramifications of that, Donaldson said, is that approvals would create stimulus spending at the state and local levels independent of any action at the federal level.

"All of that spending would be sourced from new-money bonds, not the refundings that continue to drive supply in a low interest-rate world," Donaldson said. "The spending from these bonds could well be more targeted and less wasteful than whatever comes from Washington, regardless of who wins the election."

When it comes to regulatory reform, meanwhile, participants, like Donaldson, are on board with increased enforcement by the Securities and Exchange Commission.

This includes continuing efforts to tighten the definition of so-called "political subdivisions" eligible to issue tax-exempt bonds, he said.

"We favor any changes that improve the overall quality and transparency of the municipal bond market," Donaldson said. "We hope that any change in administration does not result in cutbacks to the SEC budget that would impair the improved enforcement."

On the other hand, federal infrastructure investment is a key factor in the outcome of the election, according to other buy-side analysts.

"Although Donald Trump's top number for federal infrastructure investment was larger, Hillary Clinton's policy proposals are more specific, including $250 billion of direct federal investment and $25 billion to fund an infrastructure bank over five years," Janney's Schankel said.

Clinton's proposal for the infrastructure bank includes renewal and expansion of the Build America Bonds program.

Still, passage of tax exemption or tax reform measures is uncertain no matter which candidate takes the White House, Jim Robinson, chief executive officer of Robinson Capital, pointed out in an interview on Monday.

"The disappointment for me is we are probably looking at four more years like the last eight," said the founder and chief investment officer of the Gross Pointe, Mich.-based asset management firm, which oversees $500 million of tax-exempt investments, including separately-managed accounts, mutual funds, and a combination of other investments.

Litvack noted that tax laws are passed by Congress, not the president.

"Therefore, the presidential candidates' plans are far from 'done deals,' but rather should be considered starting points for negotiations," Litvack said.

"We believe the probability of significant tax reform is greatest if one party sweeps the elections, taking over the Presidency and majorities in both chambers of Congress," Litvack continued. "If, however, the current environment of divided government continues, we believe it is more likely that no changes or only minor changes in tax policy will occur."

Robinson said Trump's plan to lower taxes "could get some agreement if the Republicans retain the House and the Senate but that could be a negative for the municipal market. If you lower marginal tax rates it makes tax-exemption advantage less appealing."

Robinson said if Clinton's tax hike proposal for high income earners is passed, that could boost demand among the most dominant players in the municipal market.

Others said there may be little short-term impact from the election outcome on the municipal market and beyond but much reservation, skepticism, and doubt.

"Given the difficulty in predicting election outcomes, in Congress as well as the Presidency, we believe it would be premature, at this time, to make any changes in allocations to municipal bonds based on potential changes in tax policy," Litvack said.

"I think that most will agree that this is the most confusing presidential election in our lifetime," Calhoun of Crews & Associates added. "Traders and municipal participants all feel a degree of uncertainty and, as we all know, the market doesn't like uncertainty."

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September Surge: N.Y. MTA & TFA Lead $11.4B Week

Friday, September 9, 2016
By Chip Barnett and Aaron Weitzman

The municipal bond market will get a healthy dose of issuance for the first full week back in September, as New York City leads municipalities looking to tap growing investor demand for their debt.

Primary Market

Estimated volume for the week of Sept. 16 is way up to $11.42 billion from a revised total of $2.59 billion in the past week, according to revised data from Thomson Reuters. The upcoming slate is composed of $9.37 billion of negotiated bond deals and $2.05 billion of competitive bond sales.

"We see excellent potential for investors to deploy cash next week as the recent rise in bond yields globally offer a window of opportunity to lock in higher yields," said Michael Pietronico, CEO at Miller Tabak Asset Management.

New York will dominate the calendar, as two issuers from the Big Apple will each be coming with deals greater than $1 billion.

The NY Metropolitan Transportation Authority is expected to come with $1.06 billion of Hudson Rail Yards Trust obligation bonds on Wednesday. The deal will be managed by Goldman, Sachs and is rated A2 by Moody's Investors Service.

The New York City Transitional Finance Authority is scheduled to hit the market with a total of $1.05 billion, including one negotiated deal and two competitive sales.

Ramirez is scheduled to price the NYC TFA's $800 million of future secured subordinate bonds on Wednesday, following a two-day retail order period.

The TFA will also bring two competitive sales of taxable of future secured subordinate bonds to market, one for $62.495 million and the other for $187.505 million.

"There is a little something for everybody and I don't anticipate any of the deals will have problems finding buyers," said a New York trader. "There is so much demand out there, pretty much anything and everything is selling."

Siebert is slated to price the State of Connecticut's $964.32 million of special tax obligation bonds and special tax obligation refunding bonds for transportation infrastructure purposes on Tuesday, following a one day retail order period. The deal is rated Aa3 by Moody's, AA by S&P Global Ratings and AA-minus by Fitch Ratings.

The largest competitive sale will come from the Virginia Public Building Authority, which will be selling three separate sales totaling $550 million, the largest totaling $386 million.

"We expect the new issue market to continue to be well received as cash continues to move into this market at a steady pace," said Pietronico. "We also expect the next few weeks to be ripe for volatility as the election and a potential tightening by the Federal Reserve begin to move markets."

Secondary Market

Top-rated municipal bonds finished weaker along with Treasuries Friday on continuing worries about the European Central bank's decision not to expand its economic stimulus program.

The yield on the 10-year benchmark muni general obligation rose four basis points to 1.49% from 1.45% on Thursday, while the yield on the 30-year rose five basis points to 2.20% from 2.15%, according to the final read of Municipal Market Data's triple-A scale.

Treasuries were weaker on Friday. The yield on the two-year Treasury rose to 0.79% from 0.77% on Thursday, the 10-year Treasury yield gained to 1.67% from 1.61% and the yield on the 30-year Treasury bond increased to 2.39% from 2.32%.

The 10-year muni to Treasury ratio was calculated at 89.2% on Friday compared to 90.0% on Thursday, while the 30-year muni to Treasury ratio stood at 92.0% versus 92.8%, according to MMD.

Week's Most Actively Traded Issues

Some of the most actively traded issues by type in the week ended Sept. 9 were from California, Ohio and Illinois issuers, according to Markit.

In the GO bond sector, the California 3s of 2046 were traded 65 times. In the revenue bond sector, the Hamilton County, Ohio 5s of 2046 were traded 33 times. And in the taxable bond sector, the Illinois 6.63s of 2035 were traded 21 times.

Week's Most Actively Quoted Issues

Puerto Rico and California issues were among the most actively quoted bonds in the week ended Sept. 9, according to Markit.

On the bid side, the Puerto Rico Commonwealth GO 5.5s of 2039 were quoted by 13 unique dealers. On the ask side, the California HFFA revenue 3s of 2047 were quoted by 29 unique dealers. And among two-sided quotes, the California taxable 7.55s of 2039 were quoted by 15 unique dealers.

Lipper Reports More Inflows

For the 49th straight week, municipal bond funds reported inflows, according to Lipper data released on Thursday. The weekly reporters saw $985.786 million of inflows in the week ended Sept. 7, after inflows of $428.291 million in the previous week, Lipper said.

The four-week moving average remained positive at $818.423 million after being in the green at $789.730 million in the previous week. A moving average is an analytical tool used to smooth out price changes by filtering out fluctuations.

Long-term muni bond funds experienced inflows, gaining $617.231 million in the latest week after inflows of $159.510 million in the previous week. Intermediate-term funds had inflows of $182.862 million after inflows of $55.211 million in the prior week.

National funds had inflows of $912.909 million on top of inflows of $342.335 million in the previous week. High-yield muni funds reported inflows of $264.215 million in the latest reporting week, after inflows of $30.474 million the previous week.

Exchange traded funds saw outflows of $71.151 million, after inflows of $95.576 million in the previous week

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Muni Market Waiting for New Issuance

Monday, August 8, 2016
By Chip Barnett and Aaron Weitzman

As municipal bond traders are waiting for the week's new issuance to start hitting screens on Tuesday, munis are weaker with yields on some top-quality munis up by as many as two basis points, traders said.

Secondary Market

Treasuries were slightly stronger on Monday around midday. The yield on the two-year Treasury was flat at 0.72% from Friday, the 10-year Treasury yield was steady at 1.58% and the yield on the 30-year Treasury bond decreased to 2.30% from 2.31%.

Top-quality municipal bonds were weaker on Monday at midday, as the yield on the 10-year benchmark muni general obligation was as many as two basis points higher from 1.44% on Friday, while the yield on the 30-year muni was also as many as two basis points higher from 2.17%, according to a read of Municipal Market Data's triple-A scale.

On Friday, the 10-year muni to Treasury ratio was calculated at 91.1% compared to 93.9% on Thursday, while the 30-year muni to Treasury ratio stood at 94.0% versus 95.3%, according to MMD.

Previous Week's Top Underwriters

The top negotiated and competitive underwriters of last week included Bank of America Merrill Lynch, Citigroup, Goldman, Sachs & Co., JPMorgan Securities and Morgan Stanley, according to Thomson Reuters data. In the week of July 31-Aug. 6, Bank of America Merrill Lynch underwrote $1.88 billion, Citigroup $1.32 billion, Goldman, Sachs & Co. $1.18 billion, JPMorgan Securities $1.02 billion and Morgan Stanley $987 million.

BlackRock's Muni Market Update

The municipal market posted its 13th consecutive month of positive performance, matching a record seen only once since 1992, according to BlackRock's municipal group report released Monday. "July proved that income pays, as the 13th month in a row of positive performance is due to income generation offsetting price losses and boosting total return," according to the report.

"The broad financial markets breathed a post-Brexit sigh of relief in July, with equities and other risk assets benefiting and higher-quality assets lagging as investors assumed a 'risk-on' stance," said the report. "Shifting expectations around the course of Federal Reserve rate normalization created uncertainty. Nevertheless, performance in the muni market highlighted the premium being paid for income-producing assets."

The group said a favorable supply/demand dynamic specifically, net negative supply continues to provide support and should help drive munis through the remainder of the summer.

"We remain positive on the asset class given this technical tailwind as well as munis' ability to act as high-quality, low-volatility portfolio diversifiers. Uncertainty over the Fed's path, U.S. economic data and the upcoming election, to name a few, will likely result in a fairly tight trading range. In this environment, we believe opportunities will be found in the primary market and in active trading strategies. We remain constructive and continue to favor the A-rated space, revenue bonds, and the health care and transportation sectors."

Fiscal year 2016 marked the first time state spending (adjusted for inflation) surpassed the pre-recession peak, based on figures from the National Association of State Budget Officers, the report noted. Spending rose 5.5%, while revenue growth was up only 2.8%. Fiscal year 2017 budgets target an average 2.5% spending growth rate, while expected revenue growth is pegged at a fairly modest 3%.

"As revenues lag, fiscal flexibility has been key, with 18 states requiring mid-year budget cuts in fiscal year 2016. This compared to only eight two years ago. While oil-producing states have followed through with substantial cuts, the use of reserves in many other states to close mid-year gaps will be problematic should economic growth slow or fall into recession."

The group also believes that with revenue growth lagging spending growth in critical areas, such as Medicaid and K-12 education, pension funding will also be further constrained, especially in the current low-interest-rate environment. Many local governments may be forced to increase pension contributions and take on riskier investments as competing needs chase scarce resources.

"The S&P Municipal Bond Index returned 0.02% in July, bringing the year-to-date return to 4.37%. On the month, credit and short to intermediate maturities outperformed, as long-dated yields reset from the all-time lows seen in the immediate wake of the Brexit vote. Attractive muni-to- Treasury ratios should continue to support demand for the tax-exempt asset class as the investor search for high-quality income continues."

Primary Market

With no larger deals pricing on Monday, municipal market participants are waiting for the first of this week's new issuance to hit screens.

There are $5.80 billion of negotiated deals set for this week along with $2.05 billion of competitive sales, with the action kicking off on Tuesday.

The action will get started with a bang on Tuesday, as it is expected to see the biggest deal of the week -- a $1.21 billion competitive sale from the state of Pennsylvania.

The Keystone State will be offering up the Second Series of 2016 general obligation bonds, which are rated Aa3 by Moody's Investors Service and AA-minus by S&P Global Ratings and Fitch Ratings.

"Given the strong mutual fund flows into the market, and the positive technical backdrop for the market overall we feel most high quality issuers that come to the market (including Pennsylvania) will see very good demand," said Michael Pietronico, CEO at Miller Tabak Asset Management. "While Friday's employment report may move market yields higher over the next few days, it remains, in our view, a bond market that rewards investors who seek opportunities to invest at lower prices."

In the negotiated sector on Tuesday, Barclays Capital Markets is set to price for retail investors the Regents of the University of California Medical Center's $1.05 billion of Series 2016L bonds and Series 2016M taxables. The deal, which will be priced for institutions on Wednesday, is rated Aa3 by Moody's and AA-minus by S&P.

Raymond James is expected to price the Fort Worth Independent School District, Texas' $374.44 million of unlimited tax refunding and school building bonds. The deal, which is backed by the Permanent School Fund guarantee program, is rated triple-A by Moody's and S&P.

Davidson Securities is set to price Lake Washington School District No. 414, King County, Wash.'s $203.7 million of Series 2016 unlimited tax GO and refunding bonds. The deal is rated Aa1 by Moody's and AA-plus by S&P.

Siebert Brandford Shank is expected to price the Bexar Hospital District, Texas' $190.36 million of Series 2016 limited tax refunding bonds. The deal is rated Aa1 by Moody's and AA-plus by S&P and Fitch.

Wells Fargo Securities is set to price Will County, Ill.'s $175 million of Series 2016 alternative revenue source GOs. The deal is rated triple-A by Moody's and S&P.

Citigroup is expected to price the Lexington County, S.C., Health Service District Inc.'s $171 million of hospital revenue bonds. The deal is rated A1 by Moody's, AA-minus by S&P and AA-plus by Fitch.

MSRB: Previous Session's Activity

The Municipal Securities Rulemaking Board reported 27,225 trades on Friday on volume of $12.632 billion.

Prior Week's Actively Traded Issues

Revenue bonds comprised 51.31% of new issuance in the week ended Aug. 5, up from 51.08% in the previous week, according to Markit. General obligation bonds comprised 39.07% of total issuance, up from 38.73%, while taxable bonds made up 9.62%, down from 10.19%.

Some of the most actively traded issues by type were from New York, Texas and Wisconsin issuers. In the GO bond sector, the NYC 4s of 2035 were traded 71 times. In the revenue bond sector, the University of Texas 2s of 2041 were traded 57 times. And in the taxable bond sector, the Wisconsin 3.294s of 2037 were traded 50 times.

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How the Muni Market Sails Past Disaster

Friday, July 1, 2016
By Christine Albano

How do they do it?

Municipal bonds maintained a trajectory to the record highs reached last week as a series of bankruptcies, budget debacles and defaults failed to damage investor confidence in the industry as a whole.

Municipal analysts and experts say decades of improvements from enhanced disclosure and heightened enforcement to increased transparency and growth of technological advancements have helped the broader tax-exempt market build immunity to isolated debacles in distressed municipalities.

Improved credit surveillance and information flow, advancements in online trading platforms, better market technicals, and the economy have helped investors shrug off a range of fiscal debacles from today's credit crises in Puerto Rico and Illinois, to the historic $18 billion Detroit bankruptcy in 2013 and the $2 billion Orange County, Calif., default back in 1994.

Robert Doty, president of Annapolis, Md.-based municipal securities consulting firm AGFS attributes munis' staying power to better disclosure practices and market discipline enforced by the Securities & Exchange Commission.

"The market continues to function even though we have a major issuer in the market Puerto Rico defaulting, and Illinois is teetering," he said.

Disclosure and Market Stability

Some analysts say the stability of the market is tied to economic progress and the general credit worthiness and demand for tax efficiency in the $3.7 trillion municipal market.

"As long as the tax base and the population remain near current levels the market will continue to let Illinois kick the can down the road," Michael Pietronico, chief executive officer at Miller Tabak Asset Management, said in an interview last week.

Overall, the municipal bond market has awarded lower borrowing costs to issuers with strengthening finances, and that has helped the market retain its positive nature in the midst of recent credit and fiscal crises, Pietronico said.

"Issuers believe market access is a right when in fact it is a privilege," he added.

"Detroit is a prime example of that phenomenon as they leaned on the rest of the state of Michigan to gain market access when in many minds they were bankrupt and unable to fund their own liabilities."

"Puerto Rico understands that 'penalty box' quite well, while states such as Illinois continue to pay a yield premium in a market starved for yield," Pietronico added.

Doty, who has over 45 years of experience in the municipal industry, said disclosure and transparency enforced by the SEC have continued to improve, protecting today's market in the face of credit debacles.

"We have a lot of guidance and the market has improved considerably," he said, referring not only to SEC disclosure and enforcement practices, but also the guidance and market support from the National Association of Bond Lawyers and National Federation of Municipal Analysts.

Problematic credits, such as the state of Illinois, Chicago, and New Jersey are viewed as "one-offs" that are isolated from the general market, according to Jeffrey Lipton, managing director and head of fixed income research at Oppenheimer & Co.

"These are high profile names that take up significant headline real estate, and for the most part, should not deliver very many surprises given the information flow and heavy analytical coverage," Lipton said. "The muni market is a $3.6 trillion entity with an extremely high percentage of bonds meeting timely payment of principal and interest. The asset class also experiences much higher recovery rates as compared to corporate bonds."

David Litvack, managing director and head of tax-exempt research at U.S. Trust, Bank of America Private Wealth Management said the municipal market is "benefitting from a very favorable technical environment, in which demand for tax exempt income is overwhelming available supply."

New deals are oversubscribed, and low nominal rates have caused credit spreads to tighten over the last few years as investors search for yield, he said.

"We believe Puerto Rico's credit problems have not resulted in contagion to the broader muni market, because the commonwealth is seen as an outlier," Litvack added.

Puerto Rico's fiscal and economic declines with associated bond defaults are not expected to have a systemic impact upon the broader municipal market, because its fiscal story has been widely publicized in recent years, according to Lipton.

"There has been a substantive shift in trading participants and commonwealth bond ownership to more sophisticated investors such as hedge funds and distressed buyers," Lipton said in an interview last week. "We continue to believe that any temporary market sell-off that may be triggered by a Puerto Rico event could give rise to buying opportunities," he said.

Historical Comparison

Decades of industry advancements some as basic as information flow have helped the market evolve and strengthen.

"In the 1970's the market still had physical certificates and coupons to clip," John Donaldson, director of fixed income at The Haverford Trust Co. said last week. "Today, municipal bonds trade and settle like any other issue."

Transparency has evolved and contributed to better market participation.

"We can see the details on any public issue from our Bloomberg terminal; we can access updated financial reports with a click," Donaldson said. "Back then it could easily take a week to get information necessary to make a decision on a credit you did not own.

"Price information in the form of MSRB trading data is also transparent. Secondary market pricing in the 1970's was anything but transparent," he added.

The advent of official statements on general obligation deals helped to define the practice of increased disclosure to and education of investors over the last three decades, Doty of AGFS said.

The market in recent years has fared significantly better than it did back in the mid-1970s when New York City faced default on its GO debt in 1975 due to the ill effects of a stagnant economy, according to Doty. It narrowly avoided default after the Teacher's Union agreed to invest $150 million to buy Municipal Assistance Corporation bonds, followed by a $1.3 billion in federal loans to the city for three years.

"The market was extremely disruptive when New York City had its problems, but it's a contrast, and the difference in my view is that investors can distinguish between credits and back then they couldn't," Doty said. "Official statements weren't being used very much for GOs, and New York City didn't use one until 1975."

Now, traders are able to value so-called troubled bonds based on the specific risk and arrive at yields that satisfy the investor community something that couldn't be done in the 1970s because the pricing and credit information wasn't easily and readily accessible, Doty of AGFS said.

Despite the distressed outliers, investors can rely on municipal bonds for capital preservation, portfolio liquidity, tax-exemption, as well as strong credit quality, Lipton said.

"The muni market of 2016 has, in some ways, become an extension of 2015, but overall performance is poised higher this year," he added. "Muni bond buyers have been nicely rewarded just by staying invested and clipping their coupons," he added. "Year-to-date, Barclays shows munis have returned 4.49%, versus 5.52% for Treasuries."

Lipton said a so-called "perfect storm" may create an attractive municipal bond market that may lead to even lower yields even with the ongoing debacles.

"A more accommodative Fed, the Brexit vote with all of the associated uncertainty variability in economic data, strong market technicals, and an enduring competitive edge are all converging," Lipton said. "This dynamic is expected to extend the market's 38 consecutive-week run of positive mutual fund flows, despite noted retail and institutional resistance to currently lofty prices."

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After Brexit Rally, Munis to See Low Yields, Strong Demand

Friday, June 24, 2016
By Chip Barnett and Aaron Weitzman

In one of the biggest rallies in recent memory, municipal bonds surged on Friday after Britain voted to leave the European Union.

Yields on some top-rated municipals fell as much as 17 basis points to record low levels. Analysts said the move signaled that yields will remain near all time lows longer than anyone had expected and that negative U.S. interest rates may be on the horizon.

A New York muni trader who has been in the business for over 25 years said that Friday was one of the wildest trading days that he had ever seen.

"The flight to quality was crazy overnight and muni ratios got ridiculous cheap," the trader said. "We pretty much had two types of buyers who came in and bought. We saw the mutual funds who were getting squeezed because they were getting higher coupons getting redeemed and taken out, which forced them to re-invest at lower yields. When they come in, they chase the market. But on top of that, we saw absolute low yields and attractive relative yields."

While analysts saw Friday's trading as just a one-day price movement, they also felt there were longer-term implications looming for the market.

"Today's rally is an overreaction, no doubt" said Vikram Rai, CFA and head of municipal strategy at Citi. "But there is no doubt that Brexit will mean lower yields for a longer time."

Rai said Federal Reserve Chair Janet Yellen is very cautious about roiling the financial markets by raising interest rates too early and that she had waited and bypassed a chance for a June hike in order to study any possible effects of a Brexit yes vote.

Others also saw a cautious Fed ahead.

"With the news, it seems pretty likely you take the Fed off the table now," said Jim Grabovac, senior portfolio manager at McDonnell Investment Management.

"It is off the table for July [and] unlikely conditions would warrant actions prior to the end of the year," Grabovac said. "Aside from the near-term shock, over the medium-term I think this will put pressure on rates to remain low and will stay persistent. This could also be seen as a positive for the dollar, and a stronger dollar would pressure U.S. inflation higher."

Municipal Market Data's Senior Market Analyst Randy Smolik also said he that a July rate hike by the Fed was probably off the table, but that doesn't mean the Fed won't move later in the year.

"There's no immediate satisfaction," he said, noting that Britain has up to two years to negotiate a withdrawal from the EU and that a lot could change in that time.

On the buy side, sources stressed both the short- and long-term consequences to the Brexit vote.

"The immediate impact is lower yields and higher dollar prices on most high to medium-quality bonds," said Michael Pietronico, chief executive officer at Miller Tabak Asset Management in New York City. "We sense 5% coupons will begin to lag as the ultra-high dollar prices will turn retail investors off."

Pietronico said his firm has long held that negative interest rates were heading to the United States. "We have been vocal on that call for months with our target for this to occur in the second half of 2017," he said. "If we are wrong on this call it will only be because it happens sooner.

"The United States economy cannot sustain growth with a strong U.S. dollar and the direct consequence of Brexit will be downward pressure on inflation here in America, and a Federal Reserve [that] will no longer even challenge the notion outwardly of raising rates again."

According to Friday's final read of Municipal Market Data's triple-A scale, the yield on 10-year benchmark muni general obligation fell 17 basis points to 1.36% from 1.53% on Thursday, while the 30-year muni yield declined 15 basis points to 2.08% from 2.23%. Both maturities are now at record low levels. At one point during the day, yields were down by as much as 20 basis points.

Markit said the effects from Brexit vote were felt throughout the market early on Friday, with yields on investment-grade bonds tightening 17 to 20 basis points from previous day's close.

According to Markit's evaluated bond pricing service (, yields on University of California, 5's of '46, tightened by 18 basis points.

And the rally was not isolated to top rated-munis, Markit said, adding that yields on lower rated Loma Linda University Medical Center, 5.25's of 56, tightening 14 basis points as well. Taxable California, 7.6's of 40, also rallied 10 basis points from previous day's levels.

Some analysts see a continued demand from buyers of municipal securities.

"The market for munis has been strong and this will only add to the dynamic," said Dan Heckman, senior fixed-income strategist at U.S. Bank Wealth Management. "I am not surprised the vote went that way, but I was surprised by the margin of Exit; it was a wider win than I thought would occur. What is happening today is a unwinding on the equity side."

Other market strategists agreed.

"I expect business as usual for munis after the dust of today's rally settles," Janney Municipal Strategist Alan Schankel said in an email on Friday. "As low as our rates look (munis and Treasuries), they are still above rates of Euro economies, some of which are negative (Switzerland and Germany)."

George Rusnak, Head of Global Fixed Income at Wells Fargo Wealth Management, saw a fair amount of trading volatility but said that was "both exacerbated and muted by this being a Friday in summertime," when there is typically less trading being done.

He said he was not seeing the market have any liquidity problems, but added there was a bifurcation in munis, with some buyers gravitating toward a risk off trade while other looking moving into it as a risk on trade.

Munis have done very well so far this year, he said, in terms of mutual bond fund inflows and muni to Treasury ratios.

He said the only fly in the ointment might be that low yields are forcing higher pricing and that issuers might have to change their focus.

"They are running into retail resistance," he said, adding that there's a recalibration taking in mindsets, so there may be more issues being priced with lower than 5% coupons.

But most saw strength in munis lasting beyond the day.

"We have lower yields now, but munis are hanging in there," said Dawn Mangerson, senior portfolio manager at McDonnell Investment Management. "I would say hold onto your munis for a little longer, they are a safe haven and a complement to equities."

She added that "positive yield is awesome for foreign investors."

Other analysts agreed.

While there is likely to be global economic uncertainty and global financial-market volatility, Peter Donisanu, global research analyst, and Paul Christopher, head global market strategist at Wells Fargo Investment Institute believe that the domestic impact will be manageable and investors should remain active.

"Outside of limited trade ties, the direct impact around the world is likely to be contained, and we believe that growth in the U.S. economy may slow from 1.9% to 1.7% in 2016," the team wrote in a June 24 global investment strategy report.

"Systemic risks are likely to remain subdued given significant financial tools available to central bankers and the significant amount of global liquidity available," the analysts wrote. "We believe that it is important that investors look through the uncertainties related to UK's upcoming negotiations with the EU and remain fully committed and fully invested in their long-term investment plan," Donisanu and Christopher added.

There are longer-term effects of the Brexit referendum that should be taken into account as well, strategists said.

Rai saw three possible scenarios. Politically the vote could embolden some political parties in other EU counties to also push for a membership referendum. Economically, the impact could result in slower growth in the Eurozone, he said. Slower growth means lower yields, he said, and that could be good for U.S. Treasuries. Financially, it may mean many banks which had moved headquarters to London may move back to the continent, which might hurt bank profitability.

Heckman also saw a possible political danger.

"On the long term, if other countries want to make votes to leave the EU, that would be problematic and create volatility," said Heckman.

The Brexit vote should bolster and support municipal bond prices, especially with a favorable July and August seasonal period on tap, while the long term implications of the British exit from the EU will take time to evaluate, according to Anthony Valeri of LPL Financial.

"The negative economic implications and lingering uncertainty are positive for municipal prices," Valeri told The Bond Buyer Friday afternoon. "As is typical during flight-to-safety rallies, munis lag Treasuries but are still enjoying broad-based strength -- long-term bonds outperforming intermediate, which in turn is outperforming short-term bonds."

"Despite a strong start to 2016, I don't envision recent gains fading soon," Valeri said.

Overall, Valeri said Brexit should reinforce investor demand for high-quality bonds, however, while a flight-to-safety is underway, he said municipals are unlikely to match the pace of Treasury gains. In addition, he said, central banks are now more bond friendly and the Federal Reserve rate hikes before end of year are highly unlikely.

Christine Albano contributed to this story.

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